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Judgment
Per: Kanthi Narahari Member (T)
The present Appeal is filed challenging the Impugned Order dated 26.02.2021 passed by the Adjudicating Authority (National Company Law Tribunal, Division Bench-I, Chennai) in MA/709/2019 in CP(IB)/1037/2018, whereby the Adjudicating Authority allowed the said Miscellaneous Application filed by the Resolution Professional. Aggrieved by the aforesaid order, the Respondent therein i.e., M/s. Hira Cotton Partnership Firm filed the present Appeal.
Appellant’s Submissions :-
Shri. Rahul V, Learned Counsel for the Appellant submitted that the Appellant is one of the ‘Operational Creditor’ and the ‘Corporate Debtor’ owed a sum of Rs. 5,95,05,918/- for the supply of cotton. While so, the Corporate Debtor i.e., M/s. Sholingur Textiles Limited was admitted by the Adjudicating Authority, National Company Law Tribunal on 04.02.2019 in CP(IB)/1037/2018 in an Application filed under the Insolvency and Bankruptcy Code, 2016. The Respondent herein was appointed as Resolution Professional by the Learned ‘Adjudicating Authority’.
The Appellant and the Corporate Debtor entered into a sale agreement on 22.06.2018 for transferring the land belonging to the Corporate Debtor to the Appellant towards partial settlement of the debt owed to the Appellant. By the aforesaid sale agreement, the Corporate Debtor offered to settle the said debt partially. The value of the land which was mentioned in the sale agreement was fixed at Rs. 88,54,790/-. During CIRP which was commenced on 04.02.2019, the Appellant submitted a claim in Form (B) dated 02.04.2019 for an amount of Rs. 5,06,51,128/- after adjusting for the consideration of the sale agreement.
While matters stood thus, the Respondent herein filed an Application on 03.07.2019 seeking to set aside the aforementioned sale agreement dated 22.06.2018 on the ground that the said sale agreement in favour of the Appellant being a preferential transaction within the meaning of Section 43 of the IBC 2016.
The Hon’ble Adjudicating Authority allowed the said Application by passing the above Impugned Order and set aside the sale agreement dated 22.06.2018.
The Learned Counsel submitted that apart from the facts, the Appeal is filed for the following grounds as stated in Para 9 of the grounds of Appeal. The Learned Counsel submitted that the Adjudicating Authority failed to take note of the fact that the Appellant herein has been supplying cotton to the Corporate Debtor since 2012 and there were accumulated dues which were to be settled by the Corporate Debtor. The Corporate Debtor was undergoing liquidity crisis, it chose to partially settle the debt of the Appellant by transferring a piece of land, being a non-core asset belonging to the Company. The Respondent failed to demonstrate in collusion between the Appellant and the Corporate Debtor or to demonstrate any attempt to defraud the creditors. Also, there was no dishonesty on the part of either of the parties and that the allegations put forth by the Respondent are devoid of any merit or evidence. Further, the relationship between the Appellant and the Corporate Debtor is a legitimate business relationship. The Appellant supplied cotton, the most essential raw material in the textile industry to the Corporate Debtor. There is no dispute with regard to the debt owed by the Corporate Debtor to the Appellant. The Adjudicating Authority failed to observe that the property transferred by way of sale agreement to the Appellant was free from encumbrances and the Corporate Debtor could have sold it to anyone and used the proceeds to pay the debt owed to the Appellant. Instead the Corporate Debtor directly transferred the property to the Appellant. The Hon’ble Adjudicating Authority erroneously passed the Impugned Order, failing to appreciate that the Impugned Transaction falls within the ambit of exception provided by Clause (a) of Sub Section (3) of Section 43 of the Code, being a transfer made in the ordinary course of business. The Learned Counsel submitted that the expression “ordinary course of business” has not been defined in the IBC 2016 or under the Companies Act 2013.
The Hon’ble Adjudicating Authority ought to have considered that the said Transaction was a bonafide transaction entered into by two parties in good faith and for a consideration and in the absence of any moratorium or prohibitory orders from any Adjudicating Authority. Further, the Hon’ble Adjudicating Authority ought not to have imposed the costs of Rs. 50,000/- on the Appellant that the claim in Form (B) was for the amount that was over and above the settlement of the land valued at Rs. 88,54,790/-.
In view of the grounds as mentioned above the Learned Counsel prayed this ‘Tribunal’ to set aside the Impugned Order dated 26.02.2021 passed by the Adjudicating Authority, National Company Law Tribunal, Chennai in MA/709/2019 in CP(IB)/1037/2018.
Appraisal/Analysis :-
Heard the Learned Counsel for the Appellant, perused the pleadings and documents filed along with the Appeal Paper Book(s). The only issue fell for consideration is whether the Transaction i.e., the sale agreement entered between the Appellant and the Corporate Debtor dated 22.06.2018 is a transaction that are preferential in nature between the Appellant and the Corporate Debtor as under Section 43(1) of the I & B Code 2016. The Ld. Adjudicating Authority after noting the facts in detail and relying upon the Judgment of the Hon’ble Supreme Court in the matter of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. -Vs- Axis Bank Ltd., Etc. in Civil Appeal Nos. 8512-8527 of 2019 with Civil Appeal Nos. 6777-6797 of 2019 and Civil Appeal Nos. 9357-77 of 2019 allowed the Application filed by the Respondent herein and set aside the sale agreement holding that the transaction falls within the provisions of Section 43 of the IBC, 2016 and set aside the sale agreement by accepting the prayers as made by the Respondent herein.
It is an admitted fact that the Appellant had entered sale agreement dated 22.06.2018 with the Corporate Debtor i.e., M/s. Sholingur Textiles Limited, whereby the Corporate Debtor agreed to sell 52,087 sq. ft of land to the Appellant for a consideration of Rs. 88,54,790/-. The Appellant also stated that it has supplied cotton to the Corporate Debtor and the Corporate Debtor owed to the Appellant a sum of Rs. 5,95,05,918/-. An Application filed for initiation of Corporate Insolvency against the Corporate Debtor was admitted on 04.02.2019 by the very same Adjudicating Authority in CP(IB)/1037/2018 and appointed the Respondent as Interim Resolution Professional and he was confirmed as the Resolution Professional.
After the initiation of the CIRP, the Appellant claims that he had filed Form (B) dated 02.04.2019 claiming an amount of Rs. 5,95,05,918/-. While so the Respondent filed an Application in MA/709/2019 in CP(IB)/1037/2018 praying the Adjudicating Authority to set aside the sale agreement dated 22.06.2018 on the ground that the said transaction is a preferential transaction and therefore the same need to be set aside in the interest of the Corporate Debtor. The Ld. Adjudicating Authority allowed the said MA by accepting the prayer as made in MA/709/2019 by the Resolution Professional. The following reliefs have been sought by the Resolution Professional (Respondent) herein, in MA/709/2019
1.Declare the said Agreement purporting to transfer properties belonging to the CD by way of the Sale Agreement dated 22-JUN-2018 as evidenced by the copy of the said document found in Annexure 2, executed on behalf of the CD by the 2nd Respondent, as granting preference to the 1st Respondent and thus being in contravention to Section 45 (1) of the Code.
2.Set aside the said transfer, executed by way of the aforesaid Sale Agreement dated 22-JUN-2018 in favour of the 1st Respondent, as aforesaid and require the property (ies) so transferred to vest in the Corporate Debtor and thus restore position as it existed before such transfer as if the transaction (s) has not been entered into.
3.Declare that the 1st Respondent has no right, title or interest in the subject matter properly, consequently.
4.Direct the 1st Respondent to surrender all the original documents pertaining to the said transfer including the original document found in Annexure 2, held Preferential as aforesaid, to the Resolution Professional, Applicant herein.
5.Direct that the claim filed by the 1st Respondent in Form B dated 02-APR-2019 be admitted for the revised amount of Rs. 5,95,05,918/-, by reversing the entry passed on 22-JUN-2018 in the Books of CD, giving credit to the 1st Respondent to the extend of Rs. 88,54,790/- being the transfer declared as voidable as above.
6.Impose costs to the extent of Rs. 50,000/- on the 1st Respondent to be paid as recompense to the Resolution Professional under Regulation 18, for having filed the claim in Form B knowingly claiming credit for a transaction voidable under Section 45 of the Code.
7.For such further orders, as this Hon’ble Adjudicating Authority may deem fit and proper in the circumstances of the case and render justice.
The Ld. Adjudicating Authority while allowing the Application observed as under-
28.We are of the view that taking into consideration the Sale Agreement and the recitals contained therein the transaction cannot be considered to be in the ordinary course of business or in relation to the financial affairs of the Corporate Debtor.
29.In view of all the six steps as formulated by the Hon’ble Supreme Court of India in relation to consideration of the transaction as a preferential transaction have been satisfied from the facts and circumstances of the case, we are of the view that the transaction indeed falls within the provisions of Section 43 of the IBC, 2016 and the transaction cannot be considered to be excepted from the ambit of transactions as provided under the said Section itself.
30.The 1st Respondent also not being the related party, it is also seen that the transaction under consideration in this Application has been carried as between the parties within one year period being the prescribed period for an unrelated party i.e., the 1st Respondent.
31.In the circumstances, this Application is required to be allowed as filed by the Resolution Professional by granting the reliefs as sought extracted supra in paragraph No.7.
Before proceeding to decide the issue and the findings, the relevant provision under which the Application was made by the Respondent is need to be addressed. Section 43 of the I & B Code reads thus,
43. Preferential transactions and relevant time-
(1)Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in Section 44.
(2)A corporate debtor shall be deemed to have given a preference, if—
(a)there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and
(b)the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53.
(3)For the purposes of sub-section (2), a preference shall not include the following transfers—
(a)transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
(b)any transfer creating a security interest in property acquired by the corporate debtor to the extent that—
(i)such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property; and
(ii)such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:
Provided that any transfer made in pursuance of the order of a Court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.
Explanation.— For the purpose of sub-section (3) of this section, “new value” means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.
(4)A preference shall be deemed to be given at a relevant time, if—
(a)It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or
(b)a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
In due compliance of the above provisions of Law, if the Adjudicating Authority is of the opinion that the said transaction is preferential in nature and is within the period of one year preceding the Insolvency commencement date, the said transaction can be declared as void and reverse the effect of such transaction in accordance with Section 45 sub-section (1) of the I & B Code and in accordance with the Chapter III of the I & B Code, 2016.
As stated supra, the Ld. Adjudicating Authority relied upon the Judgment of the Hon’ble Supreme Court in the matter of Anuj Jain, Interim Resolution Professional (supra) whereat Hon’ble Supreme Court has given the ratio to be adopted in relation to the provisions of the Section 43 of the IBC, 2016. Para 28.1 of the said Judgment is reproduced, here at :-
28.1.Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities per Section 25, in our view, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows:
1.In the first place, the resolution professional shall have to take two major but district steps. One shall be of sifting through the entire cargo of transactions relating to the property or an interest thereof of the corporate debtor backwards from the date of commencement of insolvency and up to the preceding two years. The other distinct step shall be of identifying the persons involved in such transactions and of putting them in two categories; one being of the persons who fall within the definition of ‘related party’ in terms of Section 5(24) of the Code and another of the remaining persons.
2.In the next step, the resolution professional ought to identify as to in which of the said transactions of preceding two years, the beneficiary is a related party of the corporate debtor and in which the beneficiary is not a related party. It would lead to bifurcation of the identified transactions into two sub-sets: One concerning related party/parties and other concerning unrelated party/parties with each sub-set requiring different analysis. The sub-set concerning unrelated party/parties shall further be trimmed to include only the transactions of preceding one year from the date of commencement of insolvency.
3.Having thus obtained two sub-sets of transactions to scan, the steps thereafter would be to examine every transaction in each of these sub-sets to find: (i) as to whether the transaction is of transfer of property or an interest thereof of the corporate debtor; and (ii) as to whether the beneficiary involved in the transaction stands in the capacity of creditor or surety or guarantor qua the corporate debtor. These steps shall lead to shortlisting of such transactions which carry the potential of being preferential.
4.In the next step, the said shortlisted transactions would be scrutinised to find if the transfer in question is made for or on account of an antecedent financial debt or operational debt or other liability owed by the corporate debtor. The transactions which are so found would be answering to clause (a) of sub-section (2) of Section 43.
5.In yet further step, such of the scanned and scrutinised transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43.
6.In the next and equally necessary step, the transaction which otherwise is to be of deemed preference, will have to pass through another filtration to find if it does not answer to either of the clauses (a) and (b) of sub-section (3) of Section 43. After the resolution professional has carried out the aforesaid volumetric as also gravimetric analysis of the transactions on the defined coordinates, he shall be required to apply to the Adjudicating Authority for necessary order/s in relation to the transaction/s that had passed through all the positive tests of sub-section (4) and sub-section (2) as also negative test of sub-section (3).
From the ratio of the above Judgment of the Hon’ble Supreme Court, the issue to be determined and arrived at whether the said transaction is a preferential transaction or not? The Resolution Professional is required to do the following as decided by the Hon’ble Supreme Court in the above paragraphs. Broadly the Resolution Professional need to evolve :-
Whether the transaction is between the related party as defined in Section 5(24) of the Code and another is non-related party.
If the party is non-related, the Resolution Professional has to see whether the transaction is preceding one year from the date of commencement of Insolvency.
In the present case, from the documents it is crystal clear that the Appellant is not a related party and the transaction is preceding one year from the date of admission of the application by the Adjudicating Authority on 04.02.2019. The sale agreement dated 22.06.2018 and the Application was admitted on 04.02.2019, is well within one year preceding the admission of Application. Therefore, the criteria as enunciated under the Code and the Law laid down by the Hon’ble Supreme Court, squarely applicable to the facts of the present case. Further, the Resolution Professional need to see whether the property belongs to the Corporate Debtor or not? In the present case, admittedly the property belongs to the Corporate Debtor as evident from the sale agreement and there is no dispute with regard to the same. Therefore, the criteria as prescribed by the Hon’ble Supreme Court in the above Judgment is fulfilled and the ‘Adjudicating Authority’ rightly allowed the Application of the Resolution Professional.
Keeping in view of the above parameters, the vital point is whether the transaction is ‘preferential one’ and whether the said transaction is beneficial to such creditor (Appellant herein) by discriminating the distribution of assets as per Section 53 of the I & B Code in case of liquidation. The Ld. Adjudicating Authority at Para 23 drawn a table where the claims have been lodged and the waterfall mechanism need to be adopted in the case of liquidation. From the perusal of the table, the Operational Creditor stands at Serial No.7 under the waterfall mechanism. In the case of liquidation, the criteria as enumerated under Section 53 need to be followed. If the said principle is followed, the Appellant stands at Serial No.7. Certainly, it amounts to preferential treatment over other Creditors and the distribution of liquidation assets namely (a) Insolvency Resolution Process Costs, Liquidation Costs and the debts which shall rank equally between and among the following namely viz. workmen’s dues, debts owed to secured creditors, wages to employees, debts to unsecured creditors, dues to the Central Government, State Governments etc.,
Therefore, this Tribunal is of the view that the said transaction is a preferential transaction and not in the ordinary course of business. Further, this Tribunal is of the considered opinion that the said transaction entered between the Appellant and the Corporate Debtor by way of sale agreement dated 26.06.2018 certainly prejudice the interest of other Creditors who have precedence in relation to the claim being settled ahead of the Appellant or even in relation to other ‘Operational Creditors’ who are similarly placed like the ‘Appellant’.
Findings :-
In view of the reasons as stated supra, this Tribunal does not find any illegality in the Order impugned dated 26.02.2021 in MA/709/2019 in CP(IB)/1037/2018 passed by the National Company Law Tribunal, Division Bench-I, Chennai and the Appeal is devoid of merits and liable to be dismissed. Accordingly, the same is dismissed. No Orders as to Costs.
The Learned Counsel for the Appellant prayed this Bench to exempt the costs to be paid by the Appellant to the Respondent i.e., Resolution Professional. Taking into consideration, the request as made by the Learned Counsel for the Appellant we set aside the cost as claimed by the Respondent before the Adjudicating Authority in its Application at Para 6 of the reliefs.